Aon Retirement and Investment Blog

Weekly Update - 20 August 2018

August 20, 2018

NEW INTELLECTUAL CAPITAL

U.S. Discount Rate Update. Average discount rates decreased in July as Treasury yields rose across all maturities and credit spreads tightened for the first time since January 2018. The average plan sponsor’s discount rate decreased 5 basis points in July. In early August, rates have decreased by 2 basis point through Tuesday August 14th, and are now up 48 basis points this year.

Global equity markets edged lower over the week as emerging market uncertainties and global trade concerns kept most regional equity markets unsettled. The S&P 500 Index rose by 0.7% over the week, outperforming the MSCI World Index, which was flat on the week. Better than expected retail sales data and more scheduled trade talks with China lifted market sentiment. On a year-to-date basis, the S&P 500 Index has outperformed the MSCI World Index (7.9% vs. 3.4%) in USD terms.

US Large Cap stocks outperformed Small Cap stocks over the week as the Russell 2000 Index rose by just 0.4%. On a year-to-date basis, the Russell 2000 Index has outperformed the S&P 500 Index (11.1% vs. 7.9%). Value stocks outperformed Growth stocks over the week as Value stocks rose by 1.1% whilst Growth stocks rose by 0.1%, as measured by MSCI USA Value and Growth Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (13.3% vs. 2.7%).

Bonds

Both the 10-year and the 30-year US treasury yield rose by 1bp each to 2.87% and 3.03%, respectively. The 20-year TIPS yield fell by 1bp to 0.85% while the 20-year breakeven remained at 2.10%.

The spread of the Bloomberg Barclays Capital Long Credit Index over the yield on US treasuries fell by 1bp to 161bps and the Bank of America Merrill Lynch US Corporate Index credit spread was unchanged at 118bps. The US high yield bond spread over US treasury yields fell by 1bp to 349bps and the spread of USD denominated EM debt over US treasury yields rose by 1bp to 363bps over the week.

Commodities

The S&P GSCI fell by 1.4% in USD terms over the week. The energy sector fell by 1.9% as the price of WTI crude oil declined by 2.5% to US$66/BBL. Crude oil prices fell as US crude inventories continued to stay at higher levels. Industrial metals fell by 4.2% as copper prices fell by 4.5% to US$5,844/MT. Agricultural prices rose by 0.8% while gold prices fell by 3.0% to US$1,178/ounce.

Currencies

The US dollar's movements against major currencies were mixed over the week. The US dollar appreciated by 0.3% against sterling, ending the week at $1.27/£. The US dollar appreciated by 0.2% against the euro, finishing the week at $1.14/€. The Japanese yen appreciated by 0.2% against the US dollar, ending the week at ¥110.46/$. The Canadian dollar remain unchanged against the US dollar at C$1.31/$.

Economic Releases

Provisional readings for US retail sales outperformed expectations and rose by 0.5% in July, supported by motor vehicle and clothing purchases. Analysts had forecasted retail sales growth to slow from the 0.2% increase in June to 0.1%. Elsewhere, while coming below consensus estimates of 0.3%, industrial production inched 0.1% higher in July and the previous reading was revised higher to 1.0%. Tailwinds of tax cuts and robust consumer demand have also driven a gauge of optimism among US small businesses to the second-highest level on record. The National Federation of Independent Business Small Business Optimism index rose by 0.7 points to 107.9; outperforming expectations of a slight fall. This confidence, however, was not shared by US consumers as the University of Michigan's Consumer Sentiment index dipped to an eleven month low of 95.3 from 97.9 and below expectations of 98. The impact of higher inflation may have dampened consumer sentiment.

In the Eurozone, annual GDP growth increased to 2.2% in Q2 2018, above market expectations of 2.1%. This followed higher than expected annualised quarter-on-quarter growth in Germany at 2.2%, although annual German GDP growth slowed slightly to 2.0%. Industrial production in the Eurozone fell 0.7% in June which was worse than the expected 0.4% decline. However, upward revisions to the previous month's reading led to a 0.1% increase in year-on-year growth to 2.5%. The ZEW economic sentiment index for Germany increased by 11.0 points to -11.1 in August from last month's 5-year low.

The final reading for Japanese industrial production for June was revised up to a decline of 1.8% from the preliminary estimates of a 2.1% decline. Nonetheless, it represents a large drop from the 0.2% dip in May. Japan posted a trade deficit of ¥231.2 billion in July (from June’s ¥721.4 billion surplus) which was lower than analyst forecasts of a ¥41.2 billion deficit. This was due to rising crude oil prices and faster growth of imports compared to exports. Export growth slowed down to 3.9% in the year to July. Imports rose sharply by 14.6% over the same period, up from 2.5% in June and just ahead of the estimated 14.2% increase.

In China, retail sales slowed to 8.8% over the year to July from 9.0% in June, below analyst forecasts of 9.1% growth. Industrial production figures also missed analyst forecasts of 6.3% by remaining unchanged at 6.0%. Fixed asset investment in urban regions failed to meet expectations of 6%and slumped to a record low of 5.5% for the year to July. This downward trend has occurred despite a series of initiatives aimed at boosting spending, such as tax cuts and infrastructure spending.

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